A Warning of False Dapps
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With the advent of blockchain technology many opportunities for true decentralization in applications have emerged.
Decentralization is the reduction of the influence of trusted third parties in the operation of services that foster human action and thus the economy.
These services may be payments and banking transactions, exchanges, investing services, and even property registries and ownership records.
However, the bias to capture value by developer teams has put at risk some of these applications as centralization means more profits but with the side effect of gaining more control over the services.
In this post, we will explain some of the designs that may not be as decentralized as advertised by their creators.
What Are Apps and Dapps
When we use our computers or mobile phones we use software applications, also called apps, for payments, banking, social media, productivity, and many more use cases.
As these services are provided by corporations and run on their servers, they are centralized applications controlled by these trusted third parties.
When we use similar services such as exchanges, NFTs, prediction markets, and other smart contract powered applications on blockchains these are called decentralized applications or dapps.
Dapps are supposed to be autonomous and decentralized as they run on supposedly decentralized platforms which should make them trust minimized.
Centralized Platforms Can’t Host Dapps
The way applications and decentralized applications work is that they run on software platforms called operating systems. Programmable blockchains can be considered operating systems as they provide a generalized environment where smart contracts can be deployed to power all sorts of dapps.
However, just as corporate cloud services are centralized because they are controlled by corporations and, by extension, governments, blockchains that use the proof of stake (POS) or proof of authority (POA) consensus mechanism are also centralized.
This means that any dapp that is hosted in a POS or POA blockchain will also be centralized.
This is because if the underlying operating system can be controlled by special interests, then all the functions of dapps running on it will also be subject to capture by the same special interests.
For this reason, even if the dapp design is sound, if it runs on a centralized platform it will not actually be decentralized!
Decentralized Blockchains Can Host Both Dapps and Apps
As Ronin, an active Ethereum Classic (ETC) ecosystem participant, explained recently, centralized platforms can’t host decentralized applications but decentralized blockchains can host both centralized and decentralized applications.
This is very important to understand because many fall for the trick that because an app is hosted on a blockchain, then they believe it must be decentralized.
But this is not necessarily the case, therefore it is important to be able to discern these things.
What Are False Dapps
The first category of false dapps are the ones mentioned above, which are well designed dapps but deployed on centralized blockchains such as POS or POA networks.
The second kind of false dapps are applications that are deployed on truly decentralized blockchains such as Ethereum Classic (ETC) but that are really centralized due to their design.
Indeed, dapps may have all the appearance of being decentralized but if certain design features are integrated in them, then they become really centralized because external interests or functions outside the blockchain may represent single points of risk or failure or have outright centralized power over them.
Five Signs of False Dapps
As a guide to our readers to identify false dapps on ETC and other networks we list below five typical design features that make them centralized. Note that there may be many more forms of making dapps centralized so it is important for users to be alert and educate themselves before adopting these services.
Dapps that depend on oracles: If dapps are self contained inside the blockchain, then they may be decentralized, but if they depend on software agents to relay information from off chain sources then those agents, usually called oracles, become centralizing trusted third parties. Examples of these may be algorithmic stablecoins and insurance dapps that need external inputs to determine values and transactions.
Dapps with external attachments: Similar to oracles that depend on off chain data, if dapps depend on external attachments, either to digital or physical objects, then the attachment mechanisms and the location of the external objects become the centralizing factors. Examples may be NFTs and stablecoins that represent assets that are located outside the blockchain.
Governance tokens: Dapps that have governance features such as voting rights, decision making attributes, provide some sort of ownership, or rights to dividends or interest are synthetic corporations or partnerships and will legally be treated as such. These dapps are really centralized because they can be controlled by voting majorities which is one of the things blockchain technology was trying to avoid! This is made even more problematic as usually very few governance token holders actually vote and participate in these mechanisms.
Utility tokens: Utility token powered dapps are those that need a specific token to activate their features or functionality. Utility tokens are a risk of centralization because they are usually not needed in the first place as their features could be paid for by the blockchain’s native cryptocurrency, and the fact that they are created even if not needed shows an inclination by developers to exercise future control.
Promise of future cash flows: Similar to utility tokens, if dapps promise future cash flows in the form of interest or dividends then those dapps will be prone to centralization. It is a matter of adding voting to them that they will become captured by special interests and the future revenues are in themselves and incentive to do so.
Thank you for reading this article!
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